The credit tale

What else can be expected from a government which spends more than it earns? Since the government is confronting the same structural challenge, the total borrowing burden piled up to Rs 2,999 billion at the end of FY11, representing a net growth of Rs 573 billion in a year.
To meet the growing borrowing requirements amid a compulsion to abandon inflationary sources, the governments financing pressure shifted towards financial intermediaries. The governments net borrowing from scheduled banks surged by around Rs575 billion, bringing the total owed amount to Rs1814 billion at the end of FY11 - close to 60 percent of the total government borrowing.
Expansion in deposit base, along with better liquidity position on account of improvement in foreign reserves facilitated the commercial banks to extend financing to the government in exchange for treasury securities.
The total outstanding amount in sovereign instruments, including treasury bills, PIBs, and Sukuk, stood at around Rs 2814 billion as of 30th June, of which 72 percent of the total amount is bought by the scheduled banks. This amount doesn include borrowing from SBP.
With the government under a binding to avoid borrowing from the central bank, the governments net borrowing from the central bank eased down by Rs 2.6 billion to a total of Rs1185 billion at the end of FY11.
Even though the heavy borrowing requirement of the government has weakened the banking industrys focus on the private sector, the scheduled banks net credit to private sector increased by Rs166 billion to a total of Rs2916 billion in FY11.
Credit demand from manufacturing sector increased massively during the year, with fresh demand arising from food and beverages industry and textile sector. However, this borrowing was primarily for working capital requirements rather than new investment activities of the private sector. The SBP, in its latest publication, attributed the growth in working capital demand to the rise in raw material prices, especially those of cotton, sugarcane and edible oil.
Battered by circular debt crisis, loans to electricity gas and power sector registered a net jump of Rs 53 billion in FY11.
With commercial banks shying away from the consumer sector, the share of consumer financing in private sector loans has declined to 7.5 percent at the end of FY11, as compared to around nine percent a year earlier.
As economic indicators are likely to remain the same in the near future, - a high discount rate and slow economic growth - the financing flows will be skewed towards government accounts rather than the private sector. And that would certainly cast a long shadow on the performance of the business sector.